| | By Mick James
The scandals rapidly
overtaking Indian
outsourcing giant Satyam
have profound and
worrying implications. A
billion in overstated
revenues, possibly a
quarter of the workforce
fictitious, share values
collapsing – and these
are just the opening
salvoes. Experience
shows that these things
rarely get any better as
the story unfolds,
although in this case
it’s hard to see how
things can get worse.
Already the case is
being dubbed “India’s
Enron”, and one has to
hope this is a misnomer,
because one thing that
the Enron affair
demonstrated was that
these scandals create an
enormous amount of
collateral damage:
Arthur Andersen, Enron’s
auditors, did succeed in
overturning their
conviction for
obstructing justice –
but that was long after
the firm had ceased to
exist other than as an
administrative rump.
Once again, a major
audit name is involved,
PwC (or rather one of
its many Indian
“affiliates”, thanks to
a rather arcane aspect
of Indian accountancy
regulation that imposes
a limit of 20 partners
on any audit firm). It
will be a while before
what went wrong with the
auditing emerges, and
I’d be very surprised if
PwC suffered any lasting
damage, at least outside
India. But it won’t do
people’s faith in
auditing and corporate
governance any good
generally, particularly
as Satyam only last year
received a coveted
“Golden Peacock” award
from the World Council
for Corporate
Governance.
How far will the
collateral damage spread
to firms like TCS, Wipro
and Infosys, who have
spent the last two
decades painstakingly
building India’s image
as a trusted world
leader in IT services
and outsourcing? Already | |
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| | the news that Wipro has
been blacklisted for
four years from World
Bank contracts for
providing “improper
benefits” to staff – a
charge the firm
vigorously denies – has
wiped 12% off the
company’s shares. Would
the news have caused
more than a ripple had
it not followed hard on
the heels of the Satyam
announcement? I doubt
it.
It’s hard to see how
this can be good for the
Indian outsourcing
industry or for
outsourcing as a whole.
Obviously, Satyam’s
customers will have to
go somewhere, which may
mean that its Indian
rivals will benefit, or
that clients may go for
the perceived comfort of
more familiar brands
such as IBM and
Accenture. Some clients
who may have previously
considered outsourcing
to be a “no-brainer” may
decide to re-evaluate
their position.
Outsourcing is an
invaluable business
tool, but its value
rapidly declines when
trust begins to
disappear, and the cost
savings are eroded by
the need to invest more
in duplicate onshore
resources, increased
layers of governance and
security or greater
stockholding.
Outsourcing has done
much to deconstruct the
very concept of the firm
as a closed entity – a
“company” of individuals
with a common
allegiance. The firm
seemed to be on the way
to being simply a named
entity or brand which
controlled the flow of
processes through any
number of physical or
corporate entities. Will
the pendulum swing back
the other way?
But there are serious
issues which go far
beyond the damage that
Satyam has done to
India’s corporate
reputation or the future
of outsourcing and IT.
So far in the current
crisis the major
scandals have occurred | |
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| | in the world of finance,
the esoteric realm of
“funny money”. People
may have been shocked by
the extent to which the
crisis has affected
their personal lives,
but I suspect rather
less so by the
revelation that the City
boys were either up to
no good or out of their
depth.
Satyam is different –
this is a “real world”
player, an international
company with a Big Four
auditor and clients who
are themselves household
names all over the
world, and which was,
until recently, buying
up management
consultancies in many
different countries. If
you can’t trust a
multinational company
which has been subjected
to that level of due
diligence, who can you
trust?
It’s worth
remembering that for all
our recent talk about
globalisation, the world
economy has only
relatively recently
recovered from the
damage it inflicted on
itself in the 20th
century. Before the
First World War
globalisation was moving
along happily – only to
be torn apart by
nationalism and
militarist aggression.
Now we seem to be on the
brink of another
reverse, this time
caused by a massive
erosion of trust. That’s
sad because, on the
whole, I’m in favour of
globalisation. We,
supporters of globalism,
don’t get much chance to
express ourselves – it’s
difficult to know which
restaurant to loot, for
a start – but now is the
time when we really need
to stand up for the very
uncertain progress we’ve
made so far. America has
just inaugurated its
next president and
ushered in a new era.
Will it be one in which
we continue to push
forward with
globalisation or retreat
into isolation and
protectionism? | |
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